Here's our summary of key economic events overnight that affect New Zealand, with news the US dollar has resumed its rally and yields on US Treasury bonds have risen as markets come to realise they can't beat the Fed and that interest rates will keep on rising until inflation is beaten - even if that means enduring a recession.
It does raise the question of whether any sort of 'soft landing' can be achieved through this process.
But first in Canada, retail sales fell by -2% in July from June, preliminary estimates showed. That is a backtrack from June, when retail sales rose +1.1% from May, and May was upwardly revised.
The western-backed Asian Development Bank has been funding projects in China, even though China has built its own 'development bank' and pursued emerging economy funding along its Belt & Road projects, in its own interests. The ADB plans to provide China with up to US$7.5 bln in financing from 2021 to 2025, down from US$9 bln between 2016 and 2020. But now the ADB is saying time is up on these projects and is moving to end what has become a charade by China. China's Belt & Road projects now top US$1 bln in 'investment'.
China is claiming a big increase in foreign investment in July. But there are reasons to be sceptical.
The low flow in the Yangtze River is now critical. It seems it will be at least a month yet before any relief is likely. The implications for some regions and cities are rather grim.
Japan's inflation rate rose to 2.6% in July from 2.4% in the prior month. This was the 11th straight month of increase in consumer prices and the fastest pace since April 2014, amid surging fuel and food cost following Russia's invasion of Ukraine, as well as a sharply weakening yen.
In Australia we should note that yesterday, energy from renewables was the largest feed into their electricity system nationwide, for the fist time ever.
We should also note that cattle prices have hit all-time highs in New Zealand recently. Not only are schedule prices up (especially in the South Island), but saleyard prices are too. However some saleyard activity will be constrained by wet weather, which may boost prices further. What is unusual is that this record is coming three months earlier than the usual November seasonal rise. Lamb prices are rising too, and out of season as well, but they aren't yet at record levels.
Meanwhile, carbon prices are on the rise again, after having flatlined for the past six months. At NZ$85.50/NZU they are matching their February 2022 high. The EU carbon price is also rising again, up to €96/tonne (NZ$155) and also matching their February 2022 high. It is hard to escape the sense that these prices are just getting started. One consequence will be that livestock and grain prices are about to follow them sharply higher as land is converted from food production to 'forests'. Only the wealthy will be able to keep up, sadly.
And speaking or carbon taxes, Indonesia has confirmed it will impose these on its nickel exports soon, almost certainly before the end of 2022 and probably announced at the upcoming G20 meeting to be held there in Bali (which is also the epicenter of their FMD outbreak). Indonesia is home to almost a quarter of global nickel reserves, and the metal is one of its major exports along with coal and palm oil.
The UST 10yr yield starts today at 2.97% and up +9 bps from this time yesterday and up +15 bps from this time last week. The UST 2-10 rate curve is much less negative today, now at -28 bps. Their 1-5 curve is also also much less inverted at -13 bps. Their 30 day-10yr curve is now at +80 bps and steeper than this time yesterday. The Australian ten year bond is up +13 bps at 3.48%. The China Govt ten year bond is staying lower at 2.64%. And the New Zealand Govt ten year will start today up at 3.57% and up +5 bps from yesterday's levels. A week ago it was 3.52%.
Wall Street is lower today, with the S&P500 down -1.4% and ending the week down -1.1%. The equity market correction has been tough on tech stocks today. Overnight European markets were all lower by about -1% although London managed to avoid these declines ending up +0.6% for the week. Yesterday, Tokyo was also unchanged but ended its week up +1.1%. Hong Kong ended flat as well yesterday, but lost -1.3% for the week. Shanghai closed down -0.6%. The ASX200 ended its Friday session flat too, for a +1.2% weekly gain. But and the NZX50 fell -1.1% yesterday largely on market leader Fisher & Paykel Healthcare's dimmer forecast, to end down -0.4% for the week.
The price of gold will open today at US$1745/oz which is down -US$14/oz from this time yesterday and down -US$57 for the week.
And oil prices start today down -US$1 at just on US$90/bbl in the US, while the international Brent price is now just under US$96/bbl. These levels are little-changed for the week, marginally lower if anything. North American rig counts were unchanged last week, after a string of steady rises.
The Kiwi dollar will open today at 61.7 USc which is almost -1c lower than this time yesterday. A week ago it was at 64.5, so a weekly devaluation of -4.3%. Against the Australian dollar we are also lower at 89.8 AUc and down -½c. Against the euro we have fallen to 61.5 euro cents and also a -½c drop. That all means our TWI-5 starts today at 70.8, and down -195 bps for the week.
The bitcoin price is down a rather sharp -8.2% from this time yesterday and now at US$21,355. A week ago it was US$24,076, so an -11% fall from then. Volatility over the past 24 hours has been extreme at just over +/-5.1%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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40 Comments
The volatility in the NZD is driven by the financial reef fish darting hither and thither.
But the longer term issue is that we are now running record external current account deficits of over $20 billion. And in that context we are reliant on the financial reef fish continuing to head in our direction. At some time they are going to swim away.
KeithW
The FED, our trading deficit and our future account deficit because a major part of our capability to create revenue both with exports as well as internal in New Zealand, is owned by foreign interests like our major banks. And they want to be rewarded so our account deficit will grow further.
Meanwhile, carbon prices are on the rise again, after having flatlined for the past six months. At NZ$85.50/NZU they are matching their February 2022 high. The EU carbon price is also rising again, up to €96/tonne (NZ$155) and also matching their February 2022 high. It is hard to escape the sense that these prices are just getting started. One consequence will be that livestock and grain prices are about to follow them sharply higher as land is converted from food production to 'forests'. Only the wealthy will be able to keep up, sadly.
Only the wealthy will be able to keep up? or eat.
Food is a need, we really need to think through the best way to feed the world population and mitigate GHG. Constant challenging of science vs ideology is important and shouldn't be dismissed and cancelled. Interesting podcast with Leighton Smith 169.
My mother told stories of what hunger looks like in crowds post WW2, they are not good.
As a farmer and a forester I know what is making me the most money today, I really don't believe those few shekels today are going to be a great legacy for tomorrow.
The long term users of wood, aka building in wood, should be awarded those carbon credits and not the forest owners. Forest owners in generally don't care where the wood ends up. Mostly on a boat to China where it will be used once and then incinerated. Sofar the circularity of wood from a New Zealand export position: Carbon credits are just like crypto; Money for nothing.
This is not quite true. The credits relate to the period the trees are in the ground. Once the trees are cut, then the forester has to either repay the credits or else replant the forest. The credits are only paid for the first half (or thereabouts) of the first rotation, with this reflecting the amount of carbon that will on average be in the multi-rotation forests that the forester has committed to. It id definitely not 'money for nothing'.
KeithW
I understand but my opinion remains that carbon credits for foresters is money for nothing. It invites carbon emitters to offset first instead of reducing their own emissions. Carbon credits for foresters should only be used when practically you can't reduce emissions anymore and then should think about extra sequestration to get to zero. In the current situation only the financial partners behind new forestation project will benefit. Why else would parties like MyFarm and Salt Funds offer these investment opportunities to urban investors to benefit? Nor the environment; nor the forestry and wood products industry; nor the climate.
We agree on two points. The first is that carbon credits are a financial instrument with all that this implies. The second ( and I think we agree on this) is that the price of carbon is still too low to change the behaviour of emitters. As a consequence, the ETS is driving carbon sequestration rather than emission reduction.
KeithW
And while the pine plantations are going in, the government is going to push the onus of maintaining indigenous biodiversity onto land owners with SNA's on them?
https://www.stuff.co.nz/national/politics/local-democracy-reporting/129…
Purely anecdotal, and I have no other data to back it up, but starting to have a few clients get behind on invoice payments. These clients all have exposure one way or another to construction (commercial or residential) and have typically been good payers in the past.
I'm actually surprised how few companies haven't fallen over yet, because I can't see how any main contractor has been able to turn a profit for 2 years. It's taking a lot more time to get completion (and therefore paid), with many fixed overheads due regardless.
Maybe higher interest will take a toll there eventually.
The builders are not paying PAYE, GST and their own provisional tax currently (See a story is Stuff yesterday which I can't find anymore). So they are only paying the suppliers and contractors and hoping that the Taxman has to much on their plate to chase the tax debts. See also the May statement from the Treasury that Tax receipts is seriously lacking tax revenue by several billions. The Treasury will publish the accounts for the full year in October and then we will find out how many people have not paid their taxes. (I believe the IRD was under instruction from the government not to chase up tax debts during the pandemic!)
Our builder has delayed our project. Why? They have presold about 10 sections with houses already designed, 4 bedrooms each on about 600sqm of land. The price? 1.95m each and all are presold with deposits paid. I am wondering how normal people can afford such prices given the higher interest rates? Makes no sense to me.
bonds have risen as markets come to realise they can't beat the Fed and that interest rates will keep on rising until inflation is beaten
And that likely applies to the RBNZ too. There is 20+ years of Monetary Intervention backed-up in today's prices, and no matter how well-intentioned that was, it was always destined for failure. Let's hope the unwinding doesn't happen all at once. For starters?
Cineworld, the world's second-largest cinema chain ... battles to stay afloat. Shares in the London-listed company shed as much as 80pc of their value...It followed a 60pc drop on Wednesday when the company said it was holding rescue talks with investors.
Any suggestions of a terminal OCR of 4.5% might need reassessing, higher.
The current OCR settings are looking like a bit of a joke aren't they ? Far to slow to start rising from a low they should have never sank to in the first place. The overshoot required to get back to that 1-3% target band could be really painful or are we just going to keep on living with it ?
Price of my Chinese takeaway just went up another $1, that's $15.50 to $18.50 in a matter of months.
Imagine the outrage if the house the young FHB was saving for went from $500,000 to $1,000,000 in a matter of years but got gaslighted by everyone, including the government, that it was a good problem to have.
But yes the Chinese takeaway going up 10% is an outrage 😂
I bet your Chinese hasn’t gone up much in the last 10 years though. I actually think a lot of this inflation is latent inflation after years of businesses feeling they had to keep prices as low as possible. Is a period of 7% inflation that bad after years of circa 1.2%
There is only one show in town now for all central banks, defend your currency's purchasing power or face nation destroying inflation. Until the Fed stops hiking, the pain will not stop for weaker currencies. Then when the damage is done, the deflationary depression enters the room. Brace!
Yip. For things to change people need seriously reduce spending for a while so inflation drops away again. Which means businesses selling less, less profits, dividends, tax takes etc. Likely neg GDP for a bit and thus a recession. Just think about what needs to happen for spend to seriously drop (only way inflation will fall).
Its hilarious how people seem to talk themselves into believing somehow that the fed and other reserve banks will soon start dropping rates (when inflation is still high). Until we stop spending, wages stop rising, houses fall further in value, businesses suffer.. rates will necessarily keep rising. There is no economic model where we canhave our cake (massive profits and big spend) and eat it (no inflation).
And no matter what happens here.. as pointed out.. if the fed raises the rbnz has to raise too.. to keep our currency high enough and inflation down. So either way we have to raise the ocr til their inflation falls.
Incidentally we were thinking to move house (buy and sell in the same market) so approached a good local agent. We were told the story of one local house (pretty much a commodity 4 bed 2 bathroom, 6 years old and a real FOMO hot potato last yr) which had one open home visitor (me) in 6 weeks, there was no interest at the auction and nothing for sale where we want to move. The real estate agent was suggesting a strategy to put a low price on that house and market it as as super urgent sale needed .. so desparation by the seller as the only way to stir interest The market is dead for now unless one needs to sell at a huge loss.
https://www.kiwiblog.co.nz/2022/08/guest_post_ubi_by_stealth.html
An interesting perspective on the UBI question
A UBI is working people paying for others who choose not to work. It normalizes sponging off others. There is no free lunch, somebody has to pay. I get that it is an attempt to solve the problem of beneficiaries being discouraged from working part time by abatements, and to reward those people that do valuable but unpaid work, but it is a solution that won't end well. There will be all manner of social consequences.
What is needed is a shift in mindset to where welfare is merely an emergency safety net for someone who really needs it to get back on their feet, and not a lifestyle option. Unfortunately the only practical way I see that happening is to have time limits on benefits before you are put under the microscope.
Let the flood gates open!
https://www.rnz.co.nz/news/national/473222/thousands-of-extra-workers-t…
Labour keen to get back to the immigration status quo, they will have National and ACT behind them going "rah rah yeah!". And let the productivity of the country continue to slide, while we end up with more nephs on the couch to support along with higher crime and higher house prices. BAU of the last decade or two can resume and everyone can be "happier".
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